Individual decision making in organizations

A Study Of The Structure, Content and Nature Of Individual Decision Making In Organizations

Introduction

Individual decision making is indeed an integral process in an organization. What course of action individuals in an organization, at various levels, decide to take ultimately shapes the future of the organization. In changing times, with ever increasing pressures of time and information, rising responsibilities, greater performance expectations, and faced with newer, complex and ambiguous situations, the decisions taken by a manager may not be optimal, but satisfactory enough to best suit their purpose. Today’s business environment has increased both the number and complexity of decisions that have to be made and has created a need for new decision-making processes. In spite of enough information processing tools and aids available, decisions may not always be driven quantitatively. What determines the quality of a decision is not the amount of processing that happens, but the way in which information is used by an expert. Managers deviate from the rational approach to taking decisions and start using experience and judgement rather than sequential logic or explicit reasoning to make decisions. This is intuition. It isn’t arbitrary or irrational because it is based on the past learnings of the individual, embedded in his or her unconscious. Here it is assumed that there is no compromise in the effort to engage in the decision making process. The value of intuition for effective decision making is supported by a growing body of research from psychology, organizational science and other disciplines.

Chapter 1

Literature Review

Perception And Individual Decision Making: Perception And Its Importance

Perception is defined as a process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment (Robbins, 2000). However, what one perceives can be substantially different from objective reality. It need not be, but there is often disagreement. People’s behavior is based on their perception of what reality is, not on reality itself. The world as it is perceived is the world that is behaviorally important. For example, a research on 56 top, middle and lower-level managers within three South American companies demonstrated significant differences in perceptions of environmental uncertainty amongst individuals at different levels (Ireland, Hitt, Bettis & Porras, 1987).

Factors Influencing Perception

A number of factors operate to shape and sometimes distort perception. These factors can reside in the perceiver, in the object or target being perceived, or in the context of the situation in which the perception is made (Robbins, 2000).

When an individual looks at a target and attempts to interpret what he or she sees, that interpretation is heavily influenced by personal characteristics of the individual perceiver. Among the more relevant personal characteristics affecting perception are attitudes, motives, interests, past experiences, and expectations (Daft, 2004).

Characteristics of the target that is being observed can affect what is perceived. Motion, sound, size, and other attributes of a target shape the way we see it. Because targets are not looked at in isolation, the relationship of a target to its background influences perception, as does our tendency to group close things and similar things together. Objects that are close to each other will tend to be perceived together rather separately. As a result of physical or time proximity, we often put together objects or events that are unrelated. Situation affects perception. The time at which an object or event is seen can influence attention, as can location, light, heat or any number of situational factors.

The Link Between Perception And Decision Making

Individuals in organizations make decisions. That is, they make choices from among two or more alternatives. This is done at various levels of top, middle and low management and also at non-managerial levels. Individual decision making, therefore, is an important part of organizational behavior. But how individuals in organizations make decisions and the quality of their final choices are largely influenced by their perceptions.

Decision making connects the organization’s present circumstances to actions that will take the organization into the future (Daft, 2004). The awareness that a need for decision making exists and that a decision needs to be made is a perceptual issue. Moreover, every decision requires interpretation and evaluation of information. Data are typically received from multiple sources and they need to be screened, processed and interpreted. Which data, for instance, are relevant to the decision and which are not? The perceptions of the decision maker will answer that question. Alternatives will be developed, and the strengths and weaknesses of each will need to be evaluated. Again, because alternatives don’t come with ‘red flags’, identifying them as such or with their strengths and weaknesses clearly marked, the individual decision maker’s perceptual process will have a large bearing on the final outcome (Stoner, Freeman & Gilbert, 1996).

How Are Decisions Made?

How individuals should behave in order to maximize or optimize a certain outcome is called as the rational decision making process (Harrison, 1999). In this process, it is assumed that the optimizing decision maker is rational. That is, he or she makes consistent, value-maximizing choices within specified constraints (Langley, 1989; Simon, 1986). These choices are made following a six-step rational decision making process:

1. Define the problem

2. Identify the decision criteria

3. Allocate weights to the criteria

4. Develop the alternatives

5. Select the best alternative

This process contains a number of assumptions like clarity of the problem for the decision maker, all alternatives and criteria known, clear preferences of alternatives, constant decision criteria and their stability over time, no time or cost constraints and maximum payoff chosen.

The rational model provides a fairly accurate description of the decision process when decision makers are faced with a simple problem having a few alternative courses of action, and when the cost of searching out and evaluating alternatives is low.

But such situations are the exception. Most decisions in the real world don’t follow the rational model. People are usually content to find an acceptable or reasonable solution rather than an optimizing one. Choices tend to be confined to the neighborhood of the situation and to the neighborhood of the current alternative (Beach, 1997). Most significant decisions are made by judgement, rather than by a defined prescriptive model (Bazerman, 1994)

Bounded Rationality

When faced with a complex decision making situation, most people respond by reducing the problem to a level at which it can be readily understood. This is because the limited information processing capability of human beings makes it impossible to assimilate and understand all the information necessary to optimize decisions.

Stoner, Freeman & Gilbert, 1996). Added to this, the inadequate information about the nature of the problem and its possible solutions, immediate effects of time pressure and cognitive load, and individual cognitive styles and limits of one’s own intelligence, also affect the quality of individual decisions. So people satisfice, that is, they seek solutions that are satisfactory and sufficient. They accept the first satisfactory decision they uncover, rather than maximize, or search until they find the best possible decision (Robbins, 2000).

Since the capacity of the human mind for formulating and solving complex problems is far too small to meet the requirements for full rationality, individuals operate within the confines of bounded rationality. They construct simplified models that extract the essential features from problems without capturing all their complexity (Simon, 1976). Instead of searching for the perfect or ideal decision, managers frequently settle for one that will adequately serve their purposes. Individuals can then behave rationally within the limits of the simple model.

Once a need (for taking a decision) is identified, the search for criteria and alternatives begins. But the list of criteria is likely to be far from exhaustive. The decision maker will identify a limited list made up of the more conspicuous choices. These are the choices that are easy to find and that tend to be highly visible. Once this limited set of alternatives is identified, the decision maker will begin reviewing it. But the review will not be comprehensive – not all the alternatives will be carefully evaluated. Instead, the decision maker will begin with alternatives that differ only in a relatively small degree from the choice currently in effect (Daft, 2004). Following along familiar and well-known paths, the decision maker proceeds to review the alternatives only until he or she identifies an alternative that is ‘good enough’ – one that meets an acceptable level of performance. The first alternative that meets a ‘good enough’ criterion ends the search. So the final solution represents a satisficing choice rather than an optimum one. An interesting aspect here is that the order in which alternatives are considered is critical in determining which alternative is selected. Since, decision makers use simple and limited models, they typically begin by identifying alternatives that are obvious, ones with which they are familiar, and those not too far from the status quo. Those solutions that depart least from the status quo and meet the decision criteria are most likely to be selected (Stoner, Freeman & Gilbert, 1996). A unique and creative alternative may present an optimizing solution; however, it’s unlikely to be chosen because an acceptable solution will be identified well before the decision maker is required to search very far beyond the status quo.

Intuition

Intuitive decision making has recently come out of the closet and into some respectability. Experts no longer automatically assume that using intuition to make decisions is irrational or ineffective (Agor, 1989). There is growing recognition that rational analysis has been overemphasized and that, in certain instances, relying on intuition can improve decision making. Intuitive decision making is defined as an unconscious process created out of distilled experience (Robbins, 2000). This type of decision making doesn’t necessarily operate independently of rational analysis; rather, the two complement each other. Eight conditions have been identified where people are most likely to use intuitive decision making. These are:

1. When a high level of uncertainty exists

2. When there is little precedent to draw on

3. When variables are less scientifically predictable

4. When ‘facts’ are limited

5. When facts don’t clearly point the way to go

6. When analytical data are of little use

7. When there are several plausible alternative solutions from which to choose, with good arguments for each

8. When time is limited and there is pressure to come up with the right decision (Agor, 1989)

‘Left brain’ intuitive decisions are ‘based on inputs from facts and experiences gained over the years, combined and integrated with a well-honed sensitivity or openness to other, more unconscious processes. Intuition is most useful to managers in uncertain situations where they are faced with insufficient facts and complex alternatives (Agor, 1989).

Although intuitive decision making has gained in respectability, cultures in which rational analysis is the approved way of making decisions, especially those of North America and Great Britain, do not acknowledge the use of the intuition (Daft, 2004). People with strong intuitive abilities don’t usually tell their colleagues how they reached their conclusions. Since rational analysis is considered more socially desirable, intuitive ability is often disguised or hidden.

Individual Differences: Decision-Making Styles

Research on decision styles has identified four different individual approaches to making decisions (Rowe, Boulgarides & McGrath, 1984). The basic foundation of this framework is the recognition that people differ along two dimensions. The first is their way of thinking. Some people are logical and rational. They process information serially. In contrast, some people are intuitive and creative. They perceive things as a whole. These differences are above and beyond general human limitations. The other dimension addresses a person’s tolerance for ambiguity. Some people have a high need to structure information in ways that minimize ambiguity, while others are able to process many thoughts at the same time. When these two dimensions are diagrammed, they form four styles of decision making (see Exhibit 1). These are directive, analytic, conceptual, and behavioral.

Way Of Thinking

Source: A.J. Rowe and J.D. Boulgarides, Management Decision Making, © 1992 Prentice Hall, Upper Saddle River, NJ, p. 29.

People using the directive style have low tolerance for ambiguity and seek rationality. Directive types make decisions fast and they focus on the short run.

The analytic type has a much greater tolerance for ambiguity than the directives. This leads to the desire for more information and consideration of more alternatives. They are careful decision makers with the ability to adapt or cope with new situations.

Individuals with a conceptual style tend to be very broad in their outlook and consider many alternatives. Their focus is long range and they are very good at finding creative solutions to problems.

The behavioral style categorizes decision makers who work well with others. They are concerned with the achievement of peers and those working for them and are receptive to suggestions from others, relying heavily on meetings for communicating. This type of manager tries to avoid conflict and seeks acceptance.

Although these 4 categories are distinct, most managers have characteristics that fall into more than one. This has to be thought in terms of the manager’s dominant and back-up styles. Some managers rely almost exclusively on their dominant style; however, more flexible managers can make shifts depending on the situation (Daft, 2004; Robbins, 2000). Business students, lower-level managers and top executives tend to score highest in the analytical style. This is given the emphasis formal education gives to developing rational thinking.

In addition to providing a framework for looking at individual differences, focusing on decision styles can be useful for helping one understand how two equally intelligent people, with access to the same information, can differ in the ways they approach decisions and the final choices they make.

Organizational Constraints

Managers shape their decisions to reflect the organizations’ performance evaluation and reward system, to comply with the organization’s formal regulations, and to meet organizationally imposed time constraints (Stoner, Freeman & Gilbert, 1996; Robbins, 2000). Previous organizational decisions also act as precedents to constrain current decisions.

Cultural Differences

The rational model makes no acknowledgement of cultural differences. But it is important to recognize the cultural background of the decision maker as it can have a significant influence on his or her selection of problems, depth of analysis, the importance based on logic and rationality, or whether organizational decisions should be made autocratically by an individual manager or collectively in groups (Adler, 1997).

Importance Of Individual Decision Making In Organizations

Decision effectiveness is the outcome of die interaction between the shape and definition of the problem as seen by participants, how individuals build and develop support for strategic solutions within the group and the influence particular people have on the nature and timing of the decision process itself. This has been proved by longitudinal research (Simon, 1976). Thus, an understanding of the cognitive abilities of individuals is critical to the effectiveness of strategic decisions in organizations. This is especially true for unprogrammed or unstructured decisions as how individuals find a solution has a direct effect on the effectiveness of the group decision. Understanding the conceptual models used by individuals is, therefore, vital both to the researcher attempting to understand the decision process, as well as the manager trying to evaluate the quality of ideas generated within the group.

Gaps In The Existing Research

Many studies stress the value of combining intuitive insight and normative approaches in decision making (Blattberg, Hoch, 1990). But while the impact of various factors on an individual’s decision making effectiveness has been examined by most studies, the structure and content of what they perceive has barely been explored. Relatively little can be found about the nature and form of cognitive constructs, their relationship with intuition and the role in decision making. Therefore there is a clear need to examine how managers conceptualize important issues (Ireland et al., 1987). Also, the differences and similarities between the constructs of managers at various levels in an organization have not been explored to the fullest and may provide a useful insight into the nature of an individual’s cognitive construction. Though some research on the above areas has been initiated in recent years, none has been taken up in the Indian business scenario.

Research Problem

This research aims to explore and understand the structure, content and nature of the cognitive constructs of individuals in a strategic decision making situation, by studying the similarities and differences in the same, across 2 levels of management in the same organization: the top management or the level of managers relatively remote from the day to day business and the middle management or the functional managers.

Research Objectives

Objective 1

As explained in an earlier argument, intuition emerges from experience and comprises a ‘gut feel’ on the basis of this experience (Robbins, 2000). It need not necessarily involve a conscious process of cognition from the inputs to the decision till the decision itself. This implies that intuitive managers are likely to utilize a lot of non-factual information in their decisions, reflecting their personalities and experiences.

This forms the basis of the first research objective, that is, to understand the differences between the cognitive constructs of top management executives and those of the middle managers on the basis of the factual content and the degree of intuition employed.

Objective 2

This dimension arises from the cognitive capability of an individual and his or her contribution to assessing a situation holistically, along all dimensions, arising from a better understanding of a situation.

From this, the second objective is derived, that is, to understand the differences between the cognitive constructs of top management executives and those of other middle level managers on the basis of their understanding of decision situations, as indicated by the coherence, complexity and explanation of their cognitive constructs.

Objective 3

A third dimension to intuition is the ‘questioning outlook’ on certain types of data and situations which has been observed of some senior managers (Blattberg, Hoch, 1990). This implies that the patterns of the cognitive of senior managers are substantially different from that of the middle level managers.

Thus the third objective is, to understand the difference in the composition of the cognitive constructs of top level managers and middle level managers on the basis of their exposure and experience, which leads them to perceive situations differently.

Chapter 2

Research Methodology

Information Areas

Objective 1: To understand the differences between the cognitive constructs of top management executives and those of the middle managers on the basis of the factual content and the degree of intuition employed.

• Proportion of non-factual concepts used by managers.
• Relation of the proportion of non-factual concepts used to the depth of experience and level of seniority of the individual.

Objective 2: To understand the differences between the cognitive constructs of top management executives and those of other middle level managers on the basis of their understanding of decision situations, as indicated by the coherence, complexity and explanation of their cognitive constructs.

• Coherence of understanding between managers.
• Degree of perception of a situation by managers.
• Degree of explanation offered by managers.

Objective 3: To understand the difference in the composition of the cognitive constructs of top level managers and middle level managers on the basis of their exposure and experience that leads them to perceive situations differently.

• Degree of similarity and difference between the managers in terms of common, partially common, and individual constructs.
• Proportion of the ‘residual’ individual constructs as being the genuinely intuitive dimensions perceived by each individual, not ‘seen’ by the others in the group.
• Individuals’ cognition of the dynamic aspects of the decision situation.
• Importance of a difficult-to-measure influence as stated by an individual.

Research Design

The decisions shall be studied across 2 levels of seniority (and roles) in the organization, on an individual level; this will help explore potential differences within the organization. Similarities and differences between organizations will be examined through a comparison of the cognitive schemas across ten managers (five at each level of seniority) operating in four companies with a similar scope and content of job.

Sampling Plan

The industry chosen is IT. Only one industry sector is chosen in order to be sensitive to the differences between the nature of decisions in different industries. Four different organizations will be selected across the industry sector. Ten managers from each organization (five at each of the 2 levels of seniority) will be selected for the study. Here, the convenience sampling method will be used. The location and demographic profile of the sample will be decided depending upon their convenience and availability.

Data Collection Procedure

Upon the identification of strategic decision making situations in the chosen organizations, an exploratory qualitative interview will be conducted with a representative sample of at least 2 managers at each of the 2 levels in an organization to understand their views on the decisions associated with the situations and the common goals of decision making with respect to the task at hand shall be identified. In-depth interviews will be conducted with each of the selected managers separately to map their individual cognitive constructs of decision making in the identified situations.

Analysis

In this research, the aim is to qualitatively study the structure and content of managerial perceptions using cognitive mapping to isolate the intuitive elements within their individual decision schemas. Based on the initial round of exploratory interviews, individual maps will be developed during the in-depth interviews, followed by a discussion with the respondent, for better clarity and comprehension. Cognitive mapping is a widely used technique in management research and can be used to reflect managerial perceptions of the ‘real world’ problems they face. Its popularity stems from its simplicity relative to other techniques and the ease with which a holistic picture of the individual’s perspective can be captured and represented. The technique acknowledges different viewpoints and alternative courses of action. Such mapping makes comprehension transparent, thus providing basis for further discussion on the process, content, structural complexity, and detail of individual decision making. These maps will then be analysed for their structure and content to find answers to the objectives of the research.

Chapter 3

Contribution To Literature And Utility To An Organization

The current research is based on earlier groundwork done on management research and the gaps identified in the same. It lies in the first stage of the body of research being undertaken on intuition and its role in managerial decision making. Intuition and bounded rationality have not been given due importance as inevitable components of any decision. Recently some researchers have been trying to establish the importance of intuition in various decision making situations and the value addition by incorporating what they call as the ‘sixth sense’. This study is an attempt to interpret and understand the structure, content and nature of individual decision making in organizations by studying its similarities and differences across 2 levels of management. It takes into account various external and internal factors that affect decision making and forms an important precursor to a better understanding of group decision making in organizations.

It also has important implications for improving our understanding of how important issues are conceptualized by managers in organizations, limitations of the decision making process and its possible effects on the final outcomes. It is important and relevant for managers to be conscious of such differences within their organizations. It might help to coordinate effectively with people, by being tolerant to their individual styles and understanding reasons for the same. It works both ways, i.e. for a senior manager to understand the constraints, pressures, experience, background and expertise of a subordinate, and for a middle level manager to understand the reasons for the differences in his or her way of tackling a situation and the approach and subsequent solution adopted by the boss. This understanding is the foundation for a better coordination, better handling of expectations, improving compatibility and complementing different approaches to ultimately make better decisions in organizations. As stated earlier, this research also has important implications for group decisions. Organizations are all about team coordination and team adaptability, and an individual cognitive analysis is an important first step towards improving the quality of team decision making.

References

Books

Agor, W. H. (1989). Intuition in organizations. U.S.: Sage Publications.

Bazerman, M. (1994). Judgement in managerial decision making (3rd Edition). New York: Wiley.

Stoner, J. A. F., Freeman, R.E., & Gilbert, D. R. (1996). Management (6th Edition). New Delhi, India: Prentice-Hall of India.

Adler, A. J. (1997). International dimensions of organizational behavior (3rd Edition). Cincinnati, OH: Southwestern.

Harrison, E. F. (1999). The managerial decision-making process (5th Edition). Boston: Houghton Mifflin.

Robbins, S. P. (2000). Organizational behaviour (9th Edition). New Delhi, India: Prentice-Hall of India.

Daft, R. L. (2004). Organization theory and design (8th Edition). Australia: Thomson South Western.

Journal Articles

Schwenk, C. R. (1984). Cognitive Simplification Processes in Strategic Decision-making. Strategic Management Journal, Vol. 5, Pg. 111-128.

Rowe, A.J., Boulgarides, J. D. & McGrath, M. R. (1984). Managerial Decision Making. Modules in Management Series.

Simon, H. A. (1986). Rationality in Psychology and Economics. The Journal of Business.

Ireland, R. D., Hitt, M. A. & Bettis, R.A., Porras, D. (1987). Strategy Formulation Processes: Differences in Perceptions of Strength and Weaknesses Indicators and Environmental Uncertainty by Managerial Level. Strategic Management Journal, Vol. 8, Pg. 469-485.

Langley, A. (1989). In Search of Rationality: The Purposes Behind the Use of Formal Analysis in Organizations. Administrative Science Quarterly.

Blattberg, R. C. & Hoch, S. J. (1990). Database Models and Managerial Intuition: 50% Model + 50% Manager. Management Science, Vol. 36., No. 8.

Beach, L. R. (1997). The Psychology of Decision Making. Sage Publications.

Clarke, I. (2001). Management ‘intuition’: an interpretative account of structure and content of decision schemas using cognitive maps. Journal of Management Studies.